by Jude Ayua

Two entities have received Sandbox Approval Notices (SANs) to enter the UK’s Digital Securities Sandbox (DSS). The DSS opened for applications in September 2024. Among the first applicants, ClearToken CSD Limited and Montis Digital UK Limited passed the first stage (Gate 1) in mid-December. 

The SAN does not grant the entities the right to go live until they receive approval at the second stage. They must also conduct only the activities for which they received approval. Both entities intend to operate a central securities depository (CSD) for crypto and tokenized assets.

The Digital Securities Sandbox

The Bank of England (the “Bank”) and the Financial Conduct Authority (FCA) introduced the DSS in 2023. Its three principal aims are to facilitate innovation, protect financial stability, and protect market integrity in emerging financial solutions like distributed ledger technology (DLT). It will be operational until December 2028, allowing firms to test and develop digital securities technologies. Applications will close in March 2027, and successful participants may transition to a permanent regulatory framework if the initiative proves effective.

The DSS progresses in the following stages:

• Initial application which involves identifying firms eligible to join the DSS.
• Gate 1: testing the firms’ operations and engaging with regulators to act as a trading venue or Digital Securities Depository (DSD).
• Gate 2: going live, where firms conduct live business under initial limits as a DSD or authorised operator of a trading venue.
• Gate 3: scaling which allows businesses to expand operations with a path to full authorisation as a DSD or trading venue operator.
• Gate 4: permanent regime at which stage participants gain full authorisation to operate outside the DSS.

Eligible applicants include UK-based firms of any size, whether they are established financial institutions or new market entrants. After Gate 2, participants will issue, trade, and settle real digital securities, such as equities, bonds, money market instruments. However, according to information on the BOE’s website, “the trading and settlement of derivative contracts and of ‘unbacked cryptocurrencies’ such as Bitcoin are not in the scope of the DSS.”

Similar to the EU’s DLT Pilot Regime, the DSS plans to relax the rule that exchanges and central securities depositories must always be separate. The EU’s DLT, however, has witnessed little progress, only four applicants since May 2023 after its launch, and only two approved so far.

Read also: UK to Recognize Crypto as Personal Property.

ClearToken and Montis express support for DSS

ClearToken announced its initial approval on 16 December via its website. “ClearToken is proud to announce its admission into the Bank of England’s Digital Securities Sandbox (DSS) as a Sandbox Entrant, as it seeks to ultimately operate as a Digital Securities Depository (DSD) for digital securities.” ClearToken also noted its commitment to compliance with regulations:

“…we strongly believe in the importance of a robust legal and regulatory framework to empower FMI, establish settlement finality and real-world enforceability.”

ClearToken emphasized the role of regulation in digital assets and lauded the UK’s role in the digital assets regulation:

The desired outcomes for digital asset markets are … stability, market legitimacy and institutional confidence. In the absence of mature oversight, digital assets present new opportunities for market abuse and manipulation. Regulation prevents these risks, providing a foundation for institutional adoption.

The proactive stance of the UK government and regulators through initiatives like the DSS is a major step forward… the UK creates a pathway for legal frameworks to support real-world applications.

Read also: US and UK Adopting Cryptocurrency for Public Services.

In Montis’ October 1 disclosure of intention to apply to the DSS, Martin Watkins, CEO of Montis Group, expressed strong support for the DSS initiative, saying: “We have spent over three years developing our digital CSD services for Europe and are very supportive of the UK DSS.” The entity further commended the UK’s regulatory efforts:

The introduction of the DSS by the Bank of England and the FCA marks a significant milestone for the UK’s financial sector, and Montis Group is well-positioned to be a key participant in this evolving landscape. By utilising its proven digital CSD capabilities, Montis is committed to contributing to the UK’s digital securities infrastructure, ensuring the global financial centre remains at the forefront of financial innovation.

The DSS initiative proves the UK’s effort to pioneer the integration of DLT into financial markets, while maintaining stability and integrity. ClearToken and Montis Digital highlighted the initiative’s potential to shape the future of digital securities infrastructure. The DSS’ successful implementation will drive adoption, strengthen the UK’s regulatory efforts, and position it as a leader in the global digital assets market.

Read also: UK to pass stablecoin legislation as Trump promises to lessen digital assets regulation_.

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Jude Ayua is a policy analyst at CAB. A lawyer, Jude is an associate at Infusion Lawyers where he is a member of the Blockchain & Virtual Assets Group. He is also a member of the Policy & Regulations Committee of the Stakeholders in Blockchain Technology Association of Nigeria (SiBAN). Jude reports and writes on crypto policy and regulations. jude@infusionlawyers.com

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